First Mover Americas: Bitcoin Bid as Real Bond Yield Remains Negative for Main Street

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By Omkar Godbole

Risk assets remained bid early Wednesday. In traditional markets, the real or inflation-adjusted yield on the U.S. 10-year bond flipped positive for the first time since early 2020. However, for the general population, facing an above-8% inflation, the real yield remains negative.

The 10-year real yield is considered the risk-free alternative to owning stocks or risk assets, in general.

“Real rates are a clear tightening of financial conditions, and risk assets tend to face a higher risk premia in this backdrop,” Chris Weston, head of research at Pepperstone, tweeted.

Even so, bitcoin and futures tied to the S&P 500 traded higher at press time. Perhaps investors have come to terms with the idea that the era of cheap money is passe or the real yield as represented by the yield on the 10-year Treasury inflation-protected securities does not paint an accurate picture.

The latter could be the case, as TIPS are bonds issued by the U.S. government that offer protection against inflation. So, the yield on TIPS is essentially a market-based measure of returns adjusted for inflation. It’s the preferred tool on Wall Street.

On Main Street, inflation, as represented by the consumer price index (CPI), is at a four-decade high of 8.4%. If the nominal 10-year yield is adjusted for the CPI, the real yield comes to at least -5.5%.

In other words, while Wall Street may press the sell button for risk assets, Main Street still has a solid reason to diversify into perceived store of value assets like bitcoin and gold. Whether that comes to fruition and powers a fresh crypto bull run remains to be seen.

While speculation is doing the rounds that retail investors are bargain hunting, Blockchain data shows otherwise.

“The amount of BTC added to addresses grouped by size over a 7-day period. According to on-chain data from Coin Metrics, holdings in addresses with 10k-100k have dipped, but they are being mainly picked up by addresses with 1k-10k BTC – not exactly retail size,” CoinDesk’s sister concern Genesis Global Trading said in a daily newsletter dated April 19.

Dollar index drops

The dollar index, which tracks the greenback’s value against major currencies, including the euro and the Japanese yen, dropped 0.5%.

The DXY is considered one of the biggest nemesis of bitcoin. However, the latest weakness is not necessarily bullish. That’s because fears of an early rate hike by the European Central Bank and FX market intervention by the Bank of Japan have put a bid under the euro and the yen, driving the DXY lower.

Policy tightening is bearish for risk assets, in general.

By Omkar Godbole

The U.S. 10-year real yield (market-based measure) has risen over 100 basis points in four weeks to turn positive. A similar positive crossover was last observed in early June 2013, following which investors fled emerging markets (EMs), leading to EM currency volatility.

The jury is out on whether history will repeat itself, but if it does, EM investors may park their money into digital assets, especially stablecoins, Turkey’s experience suggests.

Turkey has been facing high inflation and currency market volatility since at least 2018. Last year, the lira tanked a staggering 78% against the U.S. dollar and Turks turned to crypto assets.

“In the face of a quickly devaluing local currency, Turks have increasingly turned to crypto assets. Trading volume on Turkish-lira denominated markets on Binance reached $160B in 2021,” Coin Metrics’ analysts wrote in a report published in January.

“Dollar-backed stablecoins have been particularly popular with Turks. Over $7B of Binance’s stablecoin BUSD traded against the lira in 2021 while $36B of Tether (USDT), the largest stablecoin by total supply, traded against the lira last year. The lira’s share of all Tether volume has expanded to surpass the euro, British pound, and other major fiat currencies,” Coin Metrics’ analysts added.

Today’s newsletter was edited by Omkar Godbole and produced by Parikshit Mishra and Nelson Wang.